Brazilian regulators should allow investors to insure debt securities as part of efforts to bolster trading in corporate bonds, according to Itau Unibanco Holding SA (ITUB) and Credit Suisse Group AG. (CS)
The insurance contracts, called credit-default swaps, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Currently, only banks are allowed to buy and sell the instruments in Brazil, according Cetip SA - Balcao Organizado de Ativos e Derivativos (CTIP3), Brazil’s biggest securities clearinghouse.
Allowing the swaps would draw investors to the bond market and help the government’s effort to bolster trading in local debt, making it easier for companies to borrow money for investment, Alexandre Aoude, global head of fixed-income at Itau, said today at a conference held by the country’s capital markets association in Sao Paulo.
“Credit derivatives are a fundamental tool for the development of liquidity in the secondary market and the extension of maturities,” Aoude said during a panel on regulation. “The bonds themselves gain liquidity too because they become a hedge for people buying the derivatives.”
Brazilian regulators are reluctant to develop a local market for credit-default swaps because they believe the securities exacerbated the global financial crisis in 2008, said Fabio Jacob, director of fixed-income structuring at Credit Suisse’s Brazil unit in Sao Paulo.
2008 Financial Crisis
During the worst of the financial crisis three years ago, banks stopped making short-term loans when they couldn’t determine how exposed their trading partners were to subprime mortgages and the credit-default swaps written against the loans.
Financial companies reported more than $2 trillion in losses, according to data compiled by Bloomberg. The September 2008 bankruptcy of Lehman Brothers Holdings Inc., the largest in history, exacerbated the crisis and came just before the government’s takeover of American International Group Inc. in a bailout necessitated by the insurer’s use of credit swaps that would total $182.5 billion.
The Brazilian financial system is much better prepared to regulate credit-default swaps than the U.S. was before the financial crisis because derivatives transactions are already required to be registered so regulators can monitor the market, Jacob said during the panel discussion, sponsored by the capital markets association known as Anbima.
“We have made the potential for damage with credit derivatives null or very limited,” Jacob said. “It’s different from what happened in the U.S., where regulators had little idea, or maybe no idea, of the size of the market.”
In an e-mailed response to questions about its position on allowing investors to buy credit-default swaps on corporate bonds, the central bank said it doesn’t comment on statements by financial market participants. A spokeswoman for the Commissao de Valores Mobiliarios, Brazil’s securities regulator, declined to immediately comment.
Regulators aren’t seriously considering allowing the swaps, Carlos Ratto, commercial and product director at Cetip, said in an interview at the conference.
“The regulation that you have right now is not giving us a chance to develop the market,” he said. “You have to have institutional investors in this market because they are going to be the one who can hold this kind of position.”
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